This article is from the Australian Property Journal archive
THE national flight to quality across the country’s office markets continues apace, with the latest Property Council data showing prime office space vacancies remain lower than older office stock, while the national headline CBD vacancy rate lifted again.
The January edition of the Office Market Report, released twice a year, showed overall CBD vacancy increased from 12.8% to 13.5% nationally over the past six months. Non-CBD areas saw an increase from 17.3% to 17.9%.
Among the CBD rises were Sydney, from 11.5% to 12.2%, Melbourne, from 14.9% to a long-term high of 16.4%, and Adelaide, which jumped from 17% to 19.3%.
Brisbane and Canberra’s vacancy both inched upwards to 11.7% and 8.3% respectively, while Hobart’s lifted slightly from 2.5% to 2.8%, Darwin’s from 14.3% to 14.4%.
Perth was the only CBD to see the headline vacancy fall – down from 15.9% to 14.9%.
Prime space prospers
The vacancy rate for prime office space across the country was lower than secondary assets in every capital city besides Sydney and Adelaide. The Australian CBD prime vacancy rate across the country was 12.9% compared to 14.5% in the secondary market.
Property Council chief executive Mike Zorbas said the increase in office supply during 2021 and 2022, far surpassing the historical norm, and continued business moves towards high-grade offices explained the results.
“There is a clear divergence between older, low-quality stock and the new premium office buildings rejuvenating our cities.”
Supply continued to be a driving force behind the CBD vacancy level, with five of the last 10 reporting periods noting higher than historic levels of supply. Supply is also expected to be above historic supply to the end of the year.
Zorbas said the strength of local economies is also evident in these numbers.
“The Perth market has enjoyed a drop in vacancy rates while Brisbane and Canberra both remained stable, despite all three cities hovering around their historical average office supply levels over the past few years.
“Sydney and Melbourne continue to reflect differences in quality levels – following robust supply additions in recent years.”
Sublease vacancy increased in the CBD market, with Melbourne, Sydney and Adelaide recording sublease vacancy above their historical averages but decreased in the non-CBD market.
Meanwhile, in the non-CBD markets, seven of the last 10 reporting periods recorded higher than historic levels of supply. Supply is expected to remain below historic levels of supply until the second half of 2025.
Melbourne set for further rise
Ashley Buller, CBRE’s head of office leasing, Victoria, said the firm expects Melbourne’s vacancy figure to rise further in the first half of 2024 when Melbourne Quarter Tower is delivered, while Cushman & Wakefield’s national director, office leasing Victoria, Marc Mengoni, said the firm “believe(s) the peak is here or approaching”.
Buller said there was a “noticeable increase” in 2000 sqm-plus tenant activity, reflecting that finally more than three years on from COVID large occupiers have a much greater understanding of their occupancy needs and are prepared to make longer-term commitments.
Both Buller and Hamish Sutherland, Knight Frank’s head of office leasing, are anticipating large deals to take place in the coming months.
Buller said fringe tenants have been centralising and taking advantage of strong incentives and high-quality existing fit-outs in the Docklands area.
Over in Sydney, the CBD leasing market ended 2023 with record enquiry levels and an increase of 15% year-on-year, according to Knight Frank. The majority of the enquiry was in the smaller occupier market, with 75% being sub-1,000 sqm, while there was also an increase in occupier commitments at the larger end of the market with several 5,000 sqm-plus transactions being documented.
Rob Dickins, Cushman & Wakefield’s director, NSW office leasing, believes the Sydney CBD is becoming more core-centric.
“Looking at the CBD, while overall vacancies have tended to trend higher, the city core has been tightening. That’s driven by the flight to quality, given the CBD hosts over half of Sydney’s premium-grade net lettable area with some of the best amenities and transport.”
Perth powers through
Perth, the standout performer – and which has also seen the highest occupancy during and since COVID – saw new enquiry, transaction levels and rental growth in 2023 all exceeding the previous year. CBRE data shows CBD enquiry levels were at record levels, 23% by volume higher than the five-year average, and demand for office space is anticipated to remain strong in 2024 underpinned by expanding tenants from the mining, engineering, and government sectors.
Transaction levels were at an all-time with circa 120,500 sqm of new deals recorded over 500 sqm in 2023, nearly 50% above the five-year average, according to CBRE. Buildings such as QV1, 9 The Esplanade, Alluvion, Exchange Tower and 108 St Georges Terrace all continue to get close attention from prospective tenants.
Brisbane’s solid performance was helped by a “genuine” increase in demand across multiple industry groups, in addition to major new demand from the state and Commonwealth governments, said Mark McCann, Knight Frank head of office leasing, Queensland. However, at the smaller end of the market, demand significantly reduced in 2023 as small-to-medium businesses grappled with rising costs and interest rates; CBRE recorded a decline in transactions under 500 sqm of over 50% in the second half of 2023 compared to one year prior.
“Despite uncertain economic conditions and the state government moving into ‘caretaker mode’ in 2024, the Brisbane office market is well positioned to exceed expectations noting the limited new development supply, significant interstate migration as well as white collar growth resulting from government-funded projects infrastructure and renewable energy projects,” said CBRE’s Coen Riddle, director, office leasing.
